The Survivor

Sunday

Oct 28, 2007 at 6:23 AM

Intense and imposing, Richard S. Fuld Jr., the chief executive of Lehman Brothers, is trying to lead the firm through one of Wall Street’s worst calamities in years.

ON a winter night at the Museum of Modern Art early last year, Richard S. Fuld Jr. addressed more than 135 newly anointed Lehman Brothers managing directors and senior executives, telling them, their spouses and partners exactly how he viewed the landscape on Wall Street.

For some, the dinner might have offered the opportunity for Mr. Fuld, Lehman’s chief executive, to take a victory lap. His firm’s share price was soaring, and Lehman was regarded as one of the darlings of high finance. But Mr. Fuld wasn’t having any of it.

“We are at war,” he bellowed, according to two people who attended the candle-lit dinner. Battle analogies followed, as did stern warnings about never letting up. If Mr. Fuld’s words didn’t reflect the chumminess of the Lehman event, they still carried a hard-won authority: he has been fighting in the financial trenches for decades, trying to make Lehman the country’s pre-eminent investment bank.

Unshakeably intense and physically imposing, Mr. Fuld is now trying to navigate past one of the worst financial calamities to hit Wall Street in years. Excluding James E. Cayne, the chief executive of Bear Stearns, Mr. Fuld is the only Wall Street chief executive who ran a major firm during the last upheaval, the 1998 meltdown fed by the near collapse of Long-Term Capital Management.

While Lehman’s stock has been battered recently, its third-quarter performance was good. More important, it has thus far avoided huge write-offs like the $8.4 billion charge Merrill Lynch announced last week and the $5.8 billion charge Citigroup posted about two weeks ago. And while Mr. Cayne survived 1998, he appears to have forgotten some of the lessons of that crisis — Bear Stearns announced last month that its third-quarter earnings, upended by the subprime mortgage crisis, plunged 61 percent.

Even so, Mr. Fuld isn’t ready to pat himself on the back. At the same time, he wants to present a less militaristic face to the world. The problem is, he’s not really capable of doing that.

“I don’t like the war comment, to tell you the truth,” he says, carefully. “Every day is a battle, and ‘war,’ well, ‘war’ connotes that we are trying to kill our enemies. That’s not the view that I want them to have.”

The view he wants employees to have is that “every day is a grind, every day we’re in it, really trying to trudge through the stuff, and don’t think this is a walk through the park.” As he considers this, his body percolates. “Every day is a battle: think about the firm, do the right thing, protect your client, protect the firm, be in it, be a good team member.”

Leaning forward, almost exploding out of his seat, his voice rises into a crescendo: “Be in it. Be in it.”

The history of Wall Street is essentially the history of risk management, and while all firms and their chieftains wax poetic around that theme, the ultimate test is who remains profitable and who stays in the game. Wall Street has a well-worn habit of careering from the pain of crises to the euphoria of new opportunities, and chief executives are paid top dollar to find a balance between the two — though greed, hubris or bad judgment often get in the way.

For his part, Mr. Fuld has seen it all. He watched Lehman slide from the top tier of investment banking in the 1970s and 1980s to become a one-trick bond shop that, when it was finally spun off from its corporate parent in 1994, looked as if it might be dead in the water. He faced down rumors of the firm’s insolvency in 1998, the damage of its headquarters in the 2001 terrorist attacks and an intermittent belief among analysts that a relatively small, pure-play investment boutique like Lehman, in a world of bank behemoths, was doomed.

“He’s a survivor,” says Stephen A. Schwarzman, chief executive of the private equity giant Blackstone, and a former Lehman executive. “He’s got a sixth sense of when things are turning on you.”

THE mortgage wipeout and credit crunch that has shaken Wall Street over the last few months has made experience an especially useful asset. As subprime mortgage delinquencies started rising, entire swaths of the trillion-dollar credit business screeched to a halt. Traders panicked; hedge funds evaporated overnight. Stocks of Wall Street firms, proxies for the broader economy, plummeted.

Lehman, a leader in the subprime lending business and a player in the leveraged loan business, was in the eye of the storm. Its stock began falling, declining to $53 in early September from $86 in February — further than that of any competitors except Bear Stearns, the firm that set off the crisis when two of its hedge funds imploded.

Mr. Fuld took it in stride. “Even in the ugly days of August, this was less than a 5 out of 10 for us,” with 10 being the worst, he says, sitting in his glass office on the 31st floor of the Lehman headquarters in Midtown Manhattan.

Lehman’s third-quarter results were stronger than expected, and once the dust settled on Wall Street, among the best. Earnings fell 3 percent, to $887 million, from the same period a year earlier and 30 percent from the previous quarter. But there were no surprises, and the bank’s $700 million write-off, related to subprime mortgages and leveraged loans, looked minor compared with those of competitors.

“Lehman seemed to protect itself better than others in the third quarter,” said Michael Mayo, a Deutsche Bank analyst who has generally been an outspoken critic of subpar bank leadership but who credits Mr. Fuld with being way ahead of his peers. “That’s helped by having one of the most consistent cultures on the Street — one C.E.O. for over a decade, a one-firm mentality and comprehensive risk management.”

So intertwined are Mr. Fuld and his firm that few banking veterans think of Lehman’s culture as separable from the persona of its chief executive: obstinate, determined and accountable.

Political strategists say politicians whose “front stage” and “back stage” personalities are most closely aligned are the most successful. (Bill Clinton’s were close; Bob Dole’s were not.) Whatever stage he occupies, Mr. Fuld has one personality: direct.

“He doesn’t hide his thinking process,” says Edgar M. Bronfman Jr., chief executive of the Warner Music Group and a Lehman client. “He separates the wheat from the chaff with a very sharp blade.”

So it comes to pass that on an unseasonably warm October afternoon, Mr. Fuld is struggling with the constraints of an on-the-record interview. “I want to be straight with you, but you are making me think,” he says, half-jokingly.

Mr. Fuld is 61, with short, dark hair accenting intense eyes. He has a famously large appetite that friends and colleagues assume he burns off simply by existing. His world, say friends and colleagues, is Lehman and his three children and his wife, Kathy. (He advises employees that they had better learn to bleed green, Lehman’s corporate color.)

When the Museum of Modern Art honored him with the David Rockefeller award for “enlightened generosity and advocacy of cultural and civic endeavors” in February 2006, his acceptance speech, according to one attendee, was simple: “Kathy loves modern art and I love Kathy.”

Still, no one has ever accused Mr. Fuld of being warm and fuzzy. When asked why he likes to invoke the image of war — or why he uses phrases like “rip their throats out” and describes competitors as enemies — he responds with a wilting glare.

LEHMAN BROTHERS has been gaining ground in the United States merger-and-acquisition rankings by being a major player in the leveraged-buyout spree and capitalizing on a soup-to-nuts mortgage business that it has built over the last decade (originating mortgages, buying them through another vehicle called a conduit, securitizing and reselling them, and trading them). In 2006, it was the No. 1 underwriter of securities backed by subprime mortgages.

It was precisely Lehman’s success in these businesses that made it look so vulnerable when the markets seized up in August: huge mortgage exposure, too far out on leveraged loans. Rumors abounded as to the damage that Lehman might endure.

But the bank had positioned itself well. It has been building its long-term capital since 1999. Last fall, troubled by what it saw in the mortgage market, it started to hedge its exposure against the mortgages it was accumulating.

“Over the last two years, we saw that our underwriting standards in subprime were putting us at a disadvantage,” Mr. Fuld says. “That told us a lot — it told us a lot of people were doing things that we didn’t like. That’s when we started to lay in the beginning of our hedges.”

In the second quarter, Mr. Fuld explained to his board that the firm wanted to limit its risk by increasing its hedges and starting to reduce commitments to leveraged loans. “They saw it as early as anyone else,” said John F. Akers, the former I.B.M. chief executive who oversees the board’s risk committee.

Other banks, particularly Merrill Lynch, were piling into the subprime business just as Lehman was becoming more cautious. Still, Lehman didn’t make nearly as much money as Goldman Sachs did during the downturn, posing the question of why, if the firm saw problems coming, it didn’t do better.

“My first view is, how do I protect mother, the lightship,” Mr. Fuld says. “The risk committee’s view is not to take a proprietary position” by betting a lot of the firm’s own capital. “That’s just not our gear. Our gear is how to protect our balance sheet.”

Despite this relative conservatism, the market has shrugged off Lehman’s performance. Its stock is down 26 percent for the year, roughly the same amount as that of Merrill Lynch and Bear Stearns — suggesting that the Street believes there are other problems looming for Lehman.

In contrast to a couple of years ago, when Lehman seemingly could do no wrong, it now seems to be the target of every rumor about possible missteps. And yet the bank is more diversified than ever — 52 percent of third-quarter earnings came from international operations — and it has offered proof, at least for now, that its risk management is sound.

Even though Lehman has enhanced its international revenue and has bolstered its merger-and-acquisitions business in the United States, it is still behind overseas. It remains a relatively small player in Europe, except in Italy. It got a very late start in China, where rivals have been reaping the benefits of years of investment. And while it is by no means the simple bond shop it was in the 1990s, it still isn’t as large as many of its competitors.

For all that, however, it has still managed to add about $3 billion to revenue every year for the last four years. According to data compiled by Sanford C. Bernstein & Company, Lehman’s five-year, compound annual growth rate for net revenue and investment banking is the highest among its peers. Growth in trading revenues has also been strong.

Lehman’s return on equity, a measure of profitability, was 23.4 percent in 2006 and, more tellingly, 17.1 percent for the tough third quarter of this year— a far cry from the 4 percent of 1994 and safely within Wall Street’s top tier.

THOSE who have watched Lehman over the years say they are impressed by how far it has come. “The consensus was, ‘These guys will never make it,’” said Samuel J. Palmisano, chairman and chief executive of I.B.M. “‘They were a bond shop, they won’t go anywhere.’ Dick’s created one of the best firms on the Street.”

This summer, at the height of the credit crunch, Tishman Speyer was in the middle of a $22 billion deal with Lehman to buy Archstone-Smith Trust. The markets were in free fall and rumors were flush that Lehman was having problems. Jerry I. Speyer, one of Tishman’s founding partners, called Mr. Fuld to make sure he still had Lehman’s commitment.

“When I placed that call, I knew it was preposterous,” Mr. Speyer says. “I placed it because I had to. But I knew when I was dialing how the conversation would come out.”

Mr. Speyer never asked Mr. Fuld about the Archstone deal. Lehman remained committed, and the deal was later completed.

Industry veterans say Mr. Fuld’s drive has permeated the culture of Lehman — a good thing while he remains at the helm but a matter of concern when contemplating what will happen when he departs.

“It’s better to compete against him than to have him on your team,” said Mark D. Kvamme, a venture capitalist at Sequoia Capital who is talking about playing golf with Mr. Fuld. “He’s very gracious, but you have this ‘I don’t want to mess up’ thing when you’re on his team. I think a lot of people at Lehman are like that. People are at their best when they are around him. They don’t want to disappoint him.”

MR. FULD attended the University of Colorado at Boulder, planning to become a test pilot or an aeronautical engineer. Neither took. His time as an Air Force trainee unwound after he got into a brawl with a commanding officer who was taunting a small cadet. When Mr. Fuld tried to explain his side of the story to the officer’s superior, he was reminded that the armed forces didn’t have two sides. “This is not going to work out, is it?” Mr. Fuld responded, according to a person close to him.

He started at Lehman as an intern in 1966 and encountered a complex mentor — and the man who set his career in motion — in Lewis Glucksman, a phone-throwing, wastebasket-kicking, shirt-ripping trader. Mr. Fuld rose quickly through the ranks, earning the nickname “Gorilla” for his intensity.

In 1983, Mr. Glucksman launched a war against the firm’s blue-blooded investment bankers. He won, deposing Peter Peterson, then Mr. Glucksman’s co-chief executive. It was a Pyrrhic victory; within a year, the firm had collapsed, and in 1984 it was sold to Shearson/American Express. Mr. Fuld was one of two board members who voted against the sale.

Lehman suffered through various mergers and business mixes — what Lehman executives now call the “dark days” — before American Express decided to spin off the business in 1994. Before it did, Mr. Fuld — a trader by temperament and with only a trader’s experience — became the sole chief executive when his co-president, a banker, abruptly resigned.

Mr. Fuld suddenly found himself in charge of a public company.

“He didn’t know about a board, annual meetings or stockholder relations,” Mr. Akers says. “He didn’t know about any of those things.”

By 1998, Lehman was on relatively solid ground and having a record year, but its business still revolved around bond trading. When Long-Term Capital began to crater, Lehman was rumored to be insolvent — gossip that still irks Mr. Fuld. He describes the problems in 1998 as simply a matter of perception, but he acknowledges that he mishandled the situation.

“I ignored the rumors; my comment was keep your head down, focus on your business,” he says. “I was dead wrong. The rumors continued and I think that stubbornness hurt us; that’s not true. I know my stubbornness hurt us.”

If 1998 strained Lehman’s balance sheet, the Sept. 11 attacks tested its resolve. When terrorists attacked the World Trade Center, Lehman’s building was damaged, 6,400 people were displaced, and a new, $32 million equities trading floor, opened on Monday, was in shambles on Tuesday. One employee died and many more were traumatized.

Within weeks, Lehman was operating out of 30 remote locations, including a Hilton hotel, where the investment bank set up shop by ripping beds out of the wall to make way for desks. Two weeks after the attacks, Mr. Fuld cut a deal with Morgan Stanley to move into its Midtown building, where Lehman remains today.

Inside Lehman, Mr. Fuld isn’t a regular presence on the trading floor or in investment banking offices. Like most chief executives, he spends most of his time with clients and focuses on Lehman’s executive committee, which meets twice a week.

Despite Mr. Fuld’s emphasis on best practices, Lehman, like other Wall Street banks, has been caught up in what could hardly be called model behavior. Like its Wall Street peers, it has engaged in staple financing, which occurs when bankers advise takeover targets while simultaneously financing the buyer, creating a potential conflict of interest. (Sellers want the highest price, and buyers, and their financiers, want the lowest one.)

But whatever its flaws might be, there is a palatable sense of accountability at Lehman that derives from a strong sense of ownership, in part because employees own one-third of the stock.

If anything happens to Mr. Fuld — and there are jokes about what it would actually take for anything to happen to him — Lehman’s president, Joseph M. Gregory, is the heir apparent. Yet most people, including Mr. Gregory, do not think he will be the next chief executive.

“The job we focus on is not who the next leader will be but who is next in my seat,” Mr. Gregory says. “Whoever that is would be a logical candidate to be the next C.E.O.”

Mr. Gregory, who has worked with Mr. Fuld for 38 years, focuses a significant amount of time on Lehman’s culture. “We believe we have something unique,” he says. “I worry about how to keep it, or keep what is good about it.”

SOME senior executives at Lehman say there is still a reluctance to challenge the chief. Mr. Gregory says Mr. Fuld has improved. “He’s made it more comfortable for people to speak,” he says.

Amid the current market turmoil, Mr. Fuld may still have to prove that his firm’s performance can also speak for itself. In 2006, when Lehman’s stock price and earnings were humming along, Mr. Fuld had shirts made up that said “Lehman to $150” on the front and “Get out of my way” on the back. When the stock price surpassed $150, he focused the firm on $200.

Today, Lehman’s stock is trading at a split-adjusted $120. Yet its record looks good. It made money during the boom without losing too much — at least thus far — during the bust. But don’t expect any of this to calm down Mr. Fuld.

Asked whether he has mellowed after all these years, he looks affronted that such a word has even been uttered in his presence. “Mellow?” he responds, his voice rising to fever pitch. “Mellow?”

He then pauses a moment to collect his thoughts.

“I think I have many of the same reactions; I just handle them differently,” he says. “The good news is, thank God, I haven’t lost the fire, but I’ve learned, in all fairness, there is another view.”

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